Dubai Group offers new solution on $10bn debt

Dubai, April 13, 2012

Dubai Group, part of the investment vehicle headed by Dubai's ruler, has proposed a new solution to its $10 billion debt problem, sources said, reviving talks that stalled more than two months ago.

The company wants to pay as little as one per cent interest for an extension of its debt of up to 12 years, sources said yesterday.

The proposal, sent to lenders on the two creditor committees earlier this week and which will be put to banks at a meeting on Monday, is the first the group has offered since the government walked away from talks at the end of January.

However it is unlikely this opening salvo in the new round of talks will yield an agreement, sources said.

Under the plan, lenders will be offered new terms based on the level of security they hold. Those with assets backing their claims will be offered a better deal.

Proposed tenures run from 3.5 years for lenders holding debt in the $330 million syndicated loan backed by a stake in Malaysia's Bank Islam to 12 years for unsecured creditors.

Proposed interest rates will start at 1pc for unsecured creditors and increase incrementally for those with assets against their claims, although the higher interest rates are still regarded as low.

Accepting a nominal interest rate for such a long tenure extension would be unattractive for lenders as it would mean taking a loss on their capital.

"Although the lenders aren't giving up any of the principal amount lent, referred to as a haircut, the interest received is likely to be below their cost of capital, meaning they would make a loss," a source said.

"Under accounting rules, banks would have to recognise the losses associated with this loss-making contract when the loan commences, leading to an upfront writedown on the loan."

Dubai Group holds mainly financial assets, including stakes in Egyptian brokerage EFG Hermes and Cyprus' Marfin Popular Bank. It also has some real estate and said in March it was weighing the sale of the Jumeirah Essex House hotel in Manhattan.

Though the overall package is $10bn, the focus of Monday's talks will be on the $6bn of bank debt, with the remaining $4bn being inter-company loans the firm has agreed to rank subordinate to cash owed to lenders.

Dubai Group missed two payments in 2010 and its workout is complicated by the fact it has secured and unsecured creditors, meaning lenders have been jostling among themselves to protect their positions.

Other Dubai government-related entities which had a single class of creditor have secured restructuring agreements, such as Dubai World and Dubai International Capital, which announced a $2.5 billion deal at the start of April.

The 44-member bank group of secured and unsecured creditors consists mostly of lenders based in the Gulf and Egypt but also includes Royal Bank of Scotland and Natixis.

Dubai's Supreme Fiscal Committee, which supervised Dubai World's $25bn restructuring, ended its involvement with Dubai Group earlier this year, leaving it to deal directly with creditors and dashing hopes of a state-backed rescue.

The unsecured creditors had demanded $2bn in financial support, including a backstop guarantee of $1.8bn from the government, in December.-Reuters